By Matt Ritchie
Industry commentators are warning against putting in place a Solvency II-type regime for DB (direct benefit) pension schemes, as submissions close on the European Commission’s Green Paper on pensions.
The Green Paper, published in July, forms part of a European Commission initiative encouraging a debate around the adequacy, security, and fairness of pensions into the future.
The Solvency II directive covers insurance undertakings specifically, putting in place a three-pillar, risk-based solvency regime. The commission’s paper on pensions asks what an equivalent solvency regime for DB schemes would look like.
However, head of pensions at law firm Hogan Lovells International Jane Samsworth said that DB schemes in the UK are currently subject to funding requirements under the Pensions Act 2004, which are in most cases lower than the demands of Solvency II.
Samsworth said the European insurance lobby has argued for some time that UK DB schemes should be subject to Solvency II-equivalent requirements to ensure a level playing field, and proposals to strengthen funding requirements for DB schemes continue to be of ‘considerable concern’.
Many sponsoring employers are already contributing ‘as much as they can reasonably afford’ to make good the deficits in their DB schemes.
“I fear that the proposals demonstrate a failure to appreciate a fundamental difference between insurance companies and DB pension schemes: DB schemes have the support of a sponsoring employer, who remains ultimately responsible for the scheme. As the Pensions Regulator has stated, "the best means of delivering the members' benefits is usually for the scheme to have the continued support of a viable employer". Those of us who represent occupational pension schemes must continue to resist any ill-advised proposals that would undermine the financial stability of many sponsoring employers," Samsworth said.
The National Association of Pension Funds (NAPF) has also spoken out against a new solvency regime. The association argued that a Solvency II-equivalent regime would not be appropriate for pensions, as the industry is very different to the European insurance industry.
NAPF voiced its opposition to a new solvency regime in a formal response to the Green Paper.
The association’s chief executive Joanne Segars said that while the aim of ensuring EU member states provide strong, adequate and sustainable pensions is commendable, a Solvency II type regime is not appropriate for pensions.
“The UK pension system already provides a strong system of member protection through the strength of the employer covenant, the work of the Pensions Regulator and the safety net provided by the Pension Protection Fund. Additional solvency requirements on UK schemes would work against the Commission’s objective of promoting adequacy of pension provision and could lead to the further closure of defined-benefit schemes,” Segars said.
Submissions closed on the Green Paper on November 15. The commission will now analyse responses as it considers the best course of future action.